Welcome to the Wireless Future

On May 12, the Centers for Disease Control and Prevention released some interesting new statistics on the growing percentage of American households that have no landline or “home phone.” (The connection to health is tenuous; suffice it to say that the information is collected as part of the CDC’s National Health Survey, which is conducted by phone.)

The survey, conducted from July to December 2009, found that one in four U.S. households–24.5% of them–are now wireless-only. Another 14.9% have a landline, but receive all or most calls on their cell phones.

The percentage of households that are wireless-only increased by 4.3 percentage points from the last six months of 2008 to the last six months of 2009. It increased a similar 4.4 percentage points in the prior period.

The CDC also collects demographic data during the survey, which paints an unsurprising picture of these wireless households. Nearly half of 25 to 29 year olds (48.6%) have no landline, followed closely by 37.8% of 18 to 24 year olds and 37.2% of 30 to 34 year olds.

However, it’s interesting to note that while a larger percentage of people under 30 have no landline, the majority of wireless-only adults–59.2%–are actually over 30 years old. That’s up from 48.4% in the first six months of 2006 and reflects the fact that people who have been using cell phones for years are not necessarily buying landlines as they get older. Looking at the data, this can also be seen in the fact that the percentage of wireless-only adults has been increasing steadily in every age group.

(Before we move on from the CDC statistics, two more facts that popped out at me: Wireless-only adults are more likely than their landline counterparts to report that their health status was excellent or very good, and also less likely to have health insurance coverage. Even in the under-65 age group, more than twice as many wireless-only adults were uninsured: 29.2% to 13.8%.)

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Aside from simply being interesting, these trends also have an effect on various parts of our society. One of the most obvious is our polling practices. Traditionally, polls were conducted by dialing randomly generated landline phone numbers. However, it’s been widely acknowledged by polling organizations for several years that this method introduces a strong bias into the sample, called a coverage bias (or sometimes a non-coverage bias). The Pew Research Center found that adults age 50 and older are significantly overrepresented in landline-only surveys, comprising 66% of the average landline sample when they should be only 40%.

This coverage bias affects answers to poll questions on a variety of topics. The Pew Center found that landline-only surveys underestimate wireless Internet use by two percentage points while overestimating gun ownership by four percentage points, for example. In polling for the upcoming 2010 elections, Pew found that in a landline-only sample, Republican candidates received a 47%-to-41% margin over Democratic candidates in the 2010 generic horserace. However, voters in a combined landline-and-cell phone sample were evenly divided in their candidate preferences for this November (44% for each party).

Polling organizations are well aware of this bias, and most take steps to compensate for it. Many weight their samples so their demographics better reflect reality, and some have begun calling cell phones. However, as the Pew Center explains, there are many practical hurdles to conducting surveys by mobile phone. Cell phone numbers must be manually dialed, a significant minority are answered by minors and cooperation rates are lower. In addition, some institutions, including Pew, offer to reimburse respondents for the cell phone plan minutes used during the survey, raising the cost of the survey.

In any case, the pollsters will certainly settle on a satisfactory solution eventually, as wireless-only households become ever more common. Eventually, I wouldn’t be surprised to see landlines in private homes become a thing of the past. (Workplaces and institutions are another matter.)

That future is already pretty close to being a reality in some communities. In the Brooklyn neighborhood where I live, the median age is 27 (as of the 2000 census), 8.3 years younger than the countrywide median of 35.3. And while I don’t have any local statistics on landlines vs. cell phones, I’d be willing to bet the neighborhood has an abnormally low landline penetration rate.

This assumption is largely based on the youthful neighborhood residents, but it is also based on our unusually large proportion of renters (87.3% versus the nationwide 33.8%), who are three times more likely than homeowners to rely on a cell phone alone (according to the CDC data).

The final reason for my assumption has nothing to do with statistics, and everything to do with personal experience and anecdotal evidence. As all good investors know, treating an anecdote as evidence is a dangerous game … so humor me.

Last weekend was beautiful in New York City, sunny and warm. To take advantage of the weather, I headed to nearby Prospect Park with some friends. At some point, the discussion turned to technology, and we eventually determined that of the group of 10 or so young New Yorkers present, seven had Apple iPhones (and one a Blackberry smart phone, for which he received no small amount of flack).

Though amusing, this was surprising to no one. On multiple occasions I’ve stood on a street corner as three or more people searched for directions to their destinations on their iPhones. With one of these pocket computers (that also happens to make phone calls), a landline is the last thing any of my friends need. Welcome to the future.

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So what do you buy to profit from this future? Do you buy Apple (AAPL), the maker of the iPhone? Apple is a great company, with great management, that makes great products. It’s also a great stock that recently hit a new 52-week high of 272.46 and has held up pretty well through the market’s current correction. But while the stock could climb higher from here, I am a little worried AAPL is getting overexposed: I read about the stock a lot. So in the spirit of contrary investing, let’s focus on a company a little less well known today.

I didn’t have to think hard to come up with an alternative idea. Remember those seven iPhones at the park the other day? I noticed that of those seven, two had cracked screens. With that on my mind, I just noticed at lunch with people who work near me that of the three of us with iPhones, one has a cracked screen.

Cracking your iPhone’s screen is pretty easy to do. It’s glass, and cracks can develop if you drop your phone, sit on it too often, or walk into a railing with it in your front pocket (all of these things have happened to people I know.) Apple will fix a cracked screen for $200, which seems a bit steep to many people. So of course a thriving third-party screen replacement market has developed, with replacement screens and screen removal kits available on Amazon for as little as $11.

While I don’t know of any public iPhone screen replacement companies (it’s probably not a large enough market for a big player to emerge anyway) there are still plenty of profitable opportunities in the touch screen market. You can’t buy any of the companies that make iPhone screens (Chimei Innolux, Wintek and TPK Touch Solutions); they’re all private (and Taiwanese). But you can buy stock in one of the leading LCD and touch screen makers. This company should benefit as touch screen smart phones become ever more popular, as well as from demand from people who drop their phones and need new screens, and from the growing use of touch screens on all types of electronic devices.

The company is LG Display (LPL) and Yiannis Mostrous, editor of Silk Road Investor, recommended it in Dick Davis Digest on May 5. Here’s what he wrote:

“LG Display Co. is one of the leaders in the TFT-LCD panel market with 22% global market share, competing with Samsung Electronics. The company was established in September 1999 as a 50/50 joint venture between LG Electronics and Philips. The company recently announced first quarter results that were much stronger than expected because of global economic growth and demand. The company also raised guidance for the second quarter, supported by sales volume increases, tight supply and strong demand. Inventory in China is being run down relatively fast as demand in the country for flat panels remains exceptionally strong.

“The company has projected that LCD TV demand in 2010 will grow around 25% while 2011 will see growth of about 20%. Regarding replacement demand, the industry is already seeing the faster replacement rate even in regions previously considered very mature like Japan. The company’s projections bode well for South Korea’s economy-it expanded by 1.8% in the first quarter of the year because of a strong recovery in manufacturing, exports and spending and that expansion should continue. Exports grew by 3.4%, while manufacturing grew 3.6% after a 1.7% decline in the previous quarter. According to the Bank of Korea, the economy will grow this year at its fastest rate in four years. LG Display trades at a humble valuation of 7 times expected 2010 earnings even after the stock’s recent run. Buy LG Display up to 25.”

Wishing you success in your investing and beyond,

Chloe LuttsEditor of Dick Davis DigestFor Cabot Wealth Advisory

Editor’s Note: Get other top high-yield income stocks in Dick Davis Income Digest’s latest special report, “10 High-Yield Winners for 2010!” It’s chock full of today’s top income ideas to help grow your nest egg or enjoy a steady stream of cash–yours absolutely FREE when you to try a no-risk trial subscription to the one-of-a-kind Dick Davis Income Digest. Click below to get started today!

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Market Update

From Cabot Small-Cap Confidential:

The S&P 600 Small Cap Index is up in 20 of the last 24 days.

The stock market has been having quite the party over the past month. Since November 8, the date of the election, the S&P 500 is up by 4.8%. Small caps have crushed that performance, rising by almost 16% over the same timeframe. Much of that outperformance can likely be attributed to a more favorable relative valuation (as compared to large cap) heading into the election. And an even better outlook coming out, given what is expected to be a pro-growth administration. Given the outlook for a pro-USA administration as well, which favors small caps over large (given their 19% ex-U.S. revenue exposure vs. roughly 30% ex-U.S. for S&P 500), we essentially wound up with a pro-small cap-squared backdrop. Everything has been working.

Alert

Many top earnings winners pulled back during the two-day Brexit selloff. I want to initiate a bullish position in Applied Materials which stood out after
blowing away earnings estimates. While I like the stock, I believe that there may be limited upside in most stocks, so I want to initiate a buy-write,
which sells expensive options.

To execute this trade, you need to:
Buy AMAT Stock,
Sell to Open the August 23 Calls.

As is always the case, you can sell one call for every 100 shares of stock you buy. Or five calls for every 500 shares you purchase.

For example, you could buy AMAT stock at 23 and sell August 23 Calls for 1.00 (the math behind this net price is 23 minus 1 equals 22).
I expect you will get a better price than I'm recommending.

The most you can make on this trade is $1.00, a yield of 4.54% in just over a month if AMAT closes above 23 on August expiration.

If AMAT is unchanged on August expiration, we will have created a yield of 4.54%.

Breakeven on this trade is 22.

The most you can lose on this trade is $2200 per buy-write if AMAT were to go to zero.

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